Buyer loses bedroom when buying off-the-plan

In recent months we’ve had media reports about several developers who were enacting sunset clauses leaving buyers high and dry. Here, developers essentially terminate purchasing contracts and hand back the 10% deposit on a technicality which is at their discretion.  They are doing this because the price has gone up and they can re-sell them at a much greater profit than what they originally sold them for a year or two ago.  Now we’re hearing of a buyer who found that his bedroom was missing.  Yes, that’s right ‘missing’.  His property had changed from a one bedroom place to a studio apartment – (see below for the link to the full story).  These are current cases that show the very real risk buyers take when buying off the plan property.

The reality here is that off-the-plan purchases are speculative investments and must be treated as such.  These contracts heavily favour the developer and include shrinkage clauses and sunset clauses that can have a detrimental impact on end value or if you end up with a property at all.

One of the most common off-the-plan clauses allows up to five per cent shrinkage on the floor plan of the property at the developer’s discretion which adds up to tens of thousands of dollars in lost value.                                                      

If it’s a 100sqm two bedroom apartment and the developer decides when they’re building it that they’re going to cut a metre off the balcony or a metre off a bedroom or a lounge room, there’s nothing you can do about it and it has a serious impact on value. Other risks include; that the developer goes bankrupt, delays in construction and installation of poor quality fixtures and fittings.

Anything that you buy off the plan comes with much greater risk than established property.  You’re also punting on the fact that the market will go up. If the market goes down or due to changes in size during construction the property is worth less at completion than the figure you paid, then when you go to finance that property at settlement you’ll be in negative equity. 

A result like this will make it a lot harder to secure finance and you may have to stump up a much larger deposit. If you can’t, you could potentially lose your 10 per cent deposit.  The developer will then sell to someone else and could sue you for the difference for non-performance if they don’t achieve 90% or more of your original agreed purchase price.

Buying off the plan property is always a risky way to buy real estate but if you’re going to forge ahead in this area then here are my tips:

Engage an off the plan specialist lawyer to check the contract - Have the contract read by an experienced, specialist off-the-plan lawyer. These lawyers spend their days reading through development contracts and know what’s acceptable and what raises red flags in an off-the-plan contract.

Check if the development has FIRB approval - If the development has FIRB (Foreign Investment Review Board) approval it’s highly likely that foreign buyers have or will be buying into the development. This raises a number of concerns for me most importantly around value or perceived market value.  It's well known that foreigners will pay what they have to in order to buy a piece of Australia and any development marketed to foreign buyers is usually done so at a premium to market value.  Quite simply you don't go to the trouble of gaining FIRB approval then the added expense to market to foreign buyers unless you’re going to make more money from doing so. 

Developers will usually focus on getting some pre-sales from foreign buyers at an inflated figure to help set the tone and price expectations with local buyers.  Nothing influences a buyer more when it comes to perceived value than having some pre-sales and the price that was paid and all real estate agents and developers know this and they will play on it. 

Keep your eyes open - Don’t be fooled by glitzy brochures. Ask yourself are you buying at a genuine discount in today’s market value to offset the risk you’re taking or are you paying a premium? The best way to ascertain market value is to get an independent valuation. Don’t rely on what the selling agent, developer or marketing company provides to you but rather order and pay for your own valuation.

Beware of variations/shrinkage clauses - Standard shrinkage clauses in off-the-plan property contracts generally allow for up to five per cent shrinkage. If you’re paying $10,000 or $15,000 a sqm on a 2-bedroom, 100sqm apartment then this could easily affect the value of your property by up to $75,000 or maybe even more if your two bedroom apartment now really becomes a one bedroom plus study.

Check the finishes - If you’re buying a home to live in and you want to have the opportunity to choose things such as the materials used on the floors or bench tops, possibly have an influence on the floor plan and you’re happy to take the risks associated with buying off-the-plan then this purchasing process might be for you. Just make sure your contract is really tight to give you the best chance of actually getting what you are wanting to pay for.

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